Will Debt and Bill Consolidation Affect My Credit Rating?

by Chris Joseph

If you're writing so many checks to credit card companies each month that your hand is starting to resemble a hideous claw, you may benefit from debt consolidation. With debt consolidation you combine your many outstanding balances into one payment, often obtaining a lower interest rate in the process. If done correctly, debt consolidation won't have much of a short-term impact on your credit rating, but your hand will undoubtedly thank you for your efforts.

Short-Term Effects

In the short term, a debt consolidation loan should have little impact on your credit rating. While you are taking on additional debt and the regular monthly payment obligation that comes with it, you are also reducing or eliminating higher-interest credit card debt. These two events tend to cancel each other out in the eyes of credit reporting agencies, so your rating should remain stable.

Long-Term Effects

In the long run, the effects of debt consolidation will depend in large part on how you handle your new and existing obligations. You still need to continue to make timely payments and manage all your debt responsibly. The good news is that as you make your loan payments and reduce your debt, you should begin to see an improvement in your credit rating within a year or two of taking out the consolidation loan.

Handling Existing Accounts

If you've used the funds from your debt consolidation loan to completely pay off credit card balances, you may be tempted to cancel the cards to avoid the possibility of taking on more debt. While this may seem like a smart idea on the surface, it does come with potential pitfalls. If you've had your cards for a number of years, it may be a good idea to hang on to them. Having "old" established credit that's in good standing can actually help your credit rating instead of hurting it.

Credit Card Consolidation

Instead of taking out a loan to consolidate debt, you can also consider consolidating the debt of several credit cards onto one card to take advantage of a low, short-term "teaser" rate. Card issuers sometimes offer these rates as an enticement to transfer balances to them. This isn't always a good idea, especially if your new outstanding balance on the teaser card will exceed 30 percent of the total available balance amount. In general, it's better for your credit rating to have several cards with small balances than one or two cards with large balances.